2018 Portfolio Risk and Return: Part I

Test Code: R41 PRR1 Q-Bank

Number of questions: 43

Question Q-Code: L1-PM-PRR1-001 LOS a Section 2

1 Siraj intends to evaluate the annualized returns of his buy-and-hold strategy after making his annual deposits to an account for each of
the past three years. Which of the following methods should be used, most appropriately?

A) Geometric mean return.

B) Money-weighted return.
C) Arithmetic mean return.

Question Q-Code: L1-PM-PRR1-002 LOS a Section 2

2 An investor's transactions in a mutual fund and the fund's return over a three year period are given below:

Year 1 Year 2 Year 3

New investment at the beginning of the year $2,000 $2,200 $3,000

Investment return for the year -10% 25% 40%

Withdrawal by investor at the end of the year $0 $1,000 $0

Based on the data, the money weighted return for the investor is closest to:

A) 51.8%.
B) 24.7%.
C) 74.9%.

Question Q-Code: L1-PM-PRR1-003 LOS a Section 2

3 An analyst observes that the historic geometric returns are 10% for fixed income securities, 5% for treasury bills and 2% for inflation.
The real rate of return for fixed income securities is closest to:

A) 4.7%.
B) 7.2%.
C) 7.8%.

Question Q-Code: L1-PM-PRR1-004 LOS a Section 2

4 An analyst obtains the following annual rates of return for a mutual fund:

Year 2011 2012 2013

Return (% ) 23 -14 -1.5

The fund’s holding period return over the three-year period is closest to:

A) 4.19%.
B) 4.75%.
C) 5.29%.

Question Q-Code: L1-PM-PRR1-005 LOS a Section 2

5 Ahmed invested in a fund which offered the following returns over the last three years:

Year Assets under management at start of year Net Return (%)

1. 15 million 15

2. 20 million -5

3. 5 million 10

The money-weighted annual return is closest to:

A) 4.5%.
 B) 5.0%.
C) 12.1%.

Question Q-Code: L1-PM-PRR1-006 LOS a Section 2

6 You are evaluating the performance of two investment managers in your team:

Soomro: In the last 200 days, he has earned a holding period return of 9.2 percent.
Seemi: Over the past 5 months, her holding period return is 6.0 percent.

Which manager performed better?

A) Soomro.
B) Seemi.
C) Both did equally well.

Question Q-Code: L1-PM-PRR1-007 LOS a Section 2

7 Saman purchases two shares of Sun Co, one for $32 at time t = 0 and the other for $45 at t = 1. At t = 2, he sells them both for $53
each. The stock paid a dividend of $0.75 per share at t = 1 and at t = 2. The periodic money weighted rate of return on the investment
is closest to:

A) 23.82%.
B) 25.76%.
C) 26.75%.

Question Q-Code: L1-PM-PRR1-008 LOS a Section 2

8 Liquidity least likely impacts which of the following with respect to trading costs?

A) stock price.
B) brokerage commissions.
C) bid–ask spread.

Question Q-Code: L1-PM-PRR1-009 LOS a Section 2

9 Fred David invested in the stock of a hypothetical company called Stars Ltd. He purchased three shares worth $100 each at the
beginning of the first year. He invested in another share worth $115 before the beginning of the second year. He sold the four shares
at the end of the second year for a price of $120 per share. At the end of each period, the stock paid a dividend of $2 per share. Which
of the following is most likely to be the money-weighted rate of return?

A) 8.76%.
B) 9.62%.
C) 10.66%.

Question Q-Code: L1-PM-PRR1-010 LOS b Section 2

10 Which of the following asset classes have historically had the highest returns and standard deviation?

A) Long-term corporate bonds.

B) Large-cap stocks.
C) Small-cap stocks.

Question Q-Code: L1-PM-PRR1-011 LOS b Section 2

11 Which of the following asset classes have historically had the lowest returns and standard deviation?

A) Long term treasury bonds.

B) Treasury bills.
C) Large cap stocks.

Question Q-Code: L1-PM-PRR1-012 LOS c Section 2

12 The following table presents historical information for two stocks, ABC and XYZ:

Variance of returns for ABC 0.0308

Variance of returns for XYZ 0.0705

Correlation coefficient between ABC and XYZ 0.6500

The covariance between ABC and XYZ is closest to:

A) 0.0014.
B) 0.0717.
C) 0.0303.

Question Q-Code: L1-PM-PRR1-013 LOS c Section 2

13 A measure of how the returns of two risky assets move in relation to each other is the:
 A) portfolio return.
B) covariance.
C) standard deviation.

Question Q-Code: L1-PM-PRR1-014 LOS c Section 2

14 Ahmed’s portfolio consists of two stocks: Ivne. Ltd and Iris. Co. The standard deviation of returns is 0.25 for Ivne. Ltd and 0.14 for Iris.
Co. The covariance between the returns of the two stocks is 0.0045. The correlation of returns between them is:

A) 0.008.
B) 0.129.
C) 7.778.

Question Q-Code: L1-PM-PRR1-015 LOS c Section 4

15 Which of the following statements is least accurate?

A) If you add a stock to a portfolio where the risk of the stock is equal to the risk of the portfolio and the correlation is 0.6, the overall
risk of the new portfolio will be lower.
B) The correlation coefficient and potential benefits from diversification are inversely related.
C) A zero variance portfolio can be constructed by combining two securities with a correlation coefficient of 0.

Question Q-Code: L1-PM-PRR1-016 LOS c Section 2

16 You are a U.S investor with 78% invested in the S&P 500 and 22% invested in the Dow Jones 30 index. The risk and expected return
data is given below:

Risk (%) Expected Return Covariance (%

(%) squared)

S&P 500 16.32% 9.82 0.43

The portfolio’s expected return and risk are

Dow Jones 30 32.86% 14.97 closest to:

A) 10.95% and 15.14%.

B) 10.90% and 15.10%.
C) 11.58% and 15.10%.

Question Q-Code: L1-PM-PRR1-017 LOS c Section 2

17 The correlation between the historical returns of Stock A and Stock B is 0.75. If the variance of Stock A is 0.25 and the variance of Stock
B is 0.36, the covariance of the returns of Stock A and Stock B is closest to:

A) 0.225.
B) 0.30.
C) 0.36.

Question Q-Code: L1-PM-PRR1-018 LOS d Section 3

18 An investment has a 50% probability of returning 10% and a 50% probability of returning 4%. An investor prefers this uncertain
investment over a guaranteed return of 8%. This preference most likely indicates that the investor is risk:

A) seeking.
B) neutral.
C) averse.

Question Q-Code: L1-PM-PRR1-019 LOS d Section 3

19 The risk-return relationship for a risk averse investor is most likely to be:

A) positive.
B) negative.
C) neutral.

Question Q-Code: L1-PM-PRR1-020 LOS d Section 3

20 You are advising three clients of whom Eliyahu Goldratt is the most risk-averse. According to the utility theory, the indifference curve for
Goldratt will most likely be the one with the:

A) greatest slope coefficient.

B) smallest intercept value.
C) least convexity.

Question Q-Code: L1-PM-PRR1-021 LOS d Section 3

21 Which of the following statements about risk-averse investors is least accurate? A risk-averse investor:

A) will take additional investment risk if sufficiently compensated for this risk.
B) seeks out the investment with minimum risk, given a certain level of return.
C) avoids participating in global equity markets.
Question Q-Code: L1-PM-PRR1-022 LOS e Section 4

22 Selected information about shares of two companies is provided below:

ABC Corporation XYZ Corporation

Standard deviation 25% 30%

Correlation of returns 0.24

Portfolio weights 40% 60%

The standard deviation of returns of the portfolio formed with these two stocks is closest to:

A) 0.0043.
B) 0.2259.
C) 0.0756.

Question Q-Code: L1-PM-PRR1-023 LOS e Section 4

23 An analyst studies an investment portfolio with stocks of Company ABC and Company JKL. He wishes to compute the correlation of
returns between the stocks. However, the only bits of information available include the following data.

Stock Standard Deviation Portfolio

Weights

ABC 36% 40%

JKL 27% 60%

The standard deviation of the returns for the portfolio is 30%. The correlation coefficient for the returns is closest to:

A) 0.92.
B) 1.02.
C) 1.84.

Question Q-Code: L1-PM-PRR1-024 LOS e Section 3

24 The following data is available:

Expected Return Standard Deviation Risk aversion coefficient

15% 27% 4

The utility of this investment is closest to:​

A) 0.0040.
B) 0.0041.
C) 0.0042.

Question Q-Code: L1-PM-PRR1-025 LOS e Section 4

25 If the correlation between Stock A and Stock B in a two-asset portfolio increases during a market decline, with a constant weightage of
the assets and expected standard deviations of each, the portfolio’s volatility will:

A) increase.
B) stay constant.
C) decrease.

Question Q-Code: L1-PM-PRR1-026 LOS e Section 3

26 Arman is considering investing in a small-cap stock fund and a general bond fund. The correlation between the two fund returns is
0.12. Expected annual return equaled 16% and 6% respectively with standard deviation of 30% for small-cap stock and 11.5% for
general bond fund. If Arman requires a portfolio return of 10 percent, the proportions in each fund respectively should be closest to:

A) 30% and 70%.

B) 36.4% and 63.4%.
C) 40% and 60%.

Question Q-Code: L1-PM-PRR1-027 LOS e Section 4

27 Information about a portfolio that consist of two assets is provided below:

 Asset Portfolio Weight Standard deviation

ABC 30% 10%

JKL 70% 8%

If the correlation coefficient between the two assets is 0.8, the standard deviation of the portfolio is closest to:

A) 8.2%.
B) 9.8%.
C) 9.1%.

Question Q-Code: L1-PM-PRR1-028 LOS f Section 4

28 Assume that two securities that are present in equal proportions in an investor’s portfolio have the same expected returns and
volatility. For which of the following correlations between the two securities would the investor most likely be able to achieve the
greatest diversification benefit?

A) +0.86.
B) -0.86.
C) 0.00.

Question Q-Code: L1-PM-PRR1-029 LOS f Section 4

29 A correlation matrix of the returns for securities A, B, and C is reported below:

Security A B C

A. 1

B. -1 1

C. 0.5 -0.5 1

Assuming that the expected return and the standard deviation of each security are the same, a portfolio consisting of an equal
allocation of which two securities will be most effective for portfolio diversification? Securities:

A) A and B.
B) A and C.
C) B and C.

Question Q-Code: L1-PM-PRR1-030 LOS f Section 4

30 A portfolio contains equal weights of two securities that have the same standard deviation. If the correlation between the returns of the
two securities was to increase, the portfolio risk would most likely:

A) increase.
B) remain the same.
C) decrease.

Question Q-Code: L1-PM-PRR1-031 LOS g Section 5

31 The set of risky portfolio that give the highest return at each level of risk will most likely lie on the:

A) capital allocation line.

B) efficient frontier.
C) security market line.

Question Q-Code: L1-PM-PRR1-032 LOS g Section 5

32 The capital allocation line (CAL) dominates the efficient frontier because of the ability of the investor to:

A) invest in the risk-free asset.

B) invest in market portfolio.
C) invest in a zero-beta asset.

Question Q-Code: L1-PM-PRR1-033 LOS g Section 5

33 Which of the following in combination with the risk-free asset forms the dominant capital allocation line?

A) global minimum-variance portfolio.

B) optimal risky portfolio.
C) levered portfolio of risky assets.

Question Q-Code: L1-PM-PRR1-034 LOS g Section 5

34 Which of the following portfolios will most likely lie at the point of tangency between the capital allocation line and the efficient frontier of
 risky assets?

A) Optimal investor portfolio.

B) Global minimum variance portfolio.
C) Optimal risky portfolio.

Question Q-Code: L1-PM-PRR1-035 LOS h Section 5

35 Relative to an investor with steep upward sloping indifference curves, an investor with a less steep indifference curve most likely has:

A) a higher level of risk aversion.

B) a lower level of risk aversion.
C) the same level of risk aversion.

Question Q-Code: L1-PM-PRR1-036 LOS h Section 5

36 Investor X has a higher risk aversion than investor Y. On the capital allocation line, will investor Y's optimal portfolio have a higher
expected return?

A) Yes.
B) No, since investor Y has low risk tolerance.
C) No, since investor Y has high risk tolerance.

Question Q-Code: L1-PM-PRR1-037 LOS h Section 5

37 The optimal portfolio, as suggested by the mean–variance theory, is determined by every individual investor’s:

A) borrowing rate.
B) risk-free rate.
C) risk preference.

Question Q-Code: L1-PM-PRR1-038 LOS a Section 2

38 The IFT Fund has achieved returns of 18%, 15%, and –36% in the past three years, respectively. The fund's geometric mean return for
the past three years is closest to:

A) 3.77%.
B) -4.59%.
C) -5.12%.

Question Q-Code: L1-PM-PRR1-039 LOS a Section 2

39 An investor has achieved a return of 4% over a 10-week period. The investor’s annualized return is closest to:​

A) 22.62%.
B) 14.19%.
C) 35.81%.

Question Q-Code: L1-PM-PRR1-040 LOS c Section 2

40 An analyst observes that stock markets usually demonstrate return distributions concentrated to the right with a higher frequency of
positive deviation from the mean. This feature is most likely known as:​

A) negative skewness.
B) positive skewness.
C) kurtosis.

Question Q-Code: L1-PM-PRR1-041 LOS a Section 2

41 The annualized return for an investor who has achieved a return of 18% over an 18-month period is closest to :​

A) 11.67%.
B) 12.00%.
C) 11.33%.

Question Q-Code: L1-PM-PRR1-042 LOS c Section 2

42 An analyst observes that the historic geometric return is 10% for equities, 2% for treasury bills and 3% for inflation. The real rate of
return and risk premiums for equities are closest to:

A) 7.1% and 5.3%.

B) 6.2% and 5.4%.
C) 6.8% and 4.7%.

Question Q-Code: L1-PM-PRR1-043 LOS g Section 5

43 A set increase in risk, when one moves from left to right along an efficient frontier, will most likely lead to:​

A) Sequentially larger increases in expected return.

B) Consistent increases in expected return.
C) Sequentially smaller increases in expected return.